Is it Time to Discount, Discounting

Published: 28 Feb - 2019 by Ben Rendle

Are blanket discounts bad for business?

The retail sector are renowned for using discounts in order to boost sales during otherwise quite periods, January sales are now as much a part of the high street as chain coffee shops and fast food. After all everyone loves a bargain shoppers because their money goes further, and retailers because it it goes well they generate more profit.

There is no doubt that blanket discounts have their place within pricing strategy, as a method to clear the decks of old stock they are really useful; however using this as a regular pricing strategy is akin to playing Russian roulette, you are gambling that reduced prices will significantly increase sales but at the cost of profit, which in reality pays your bills.

The effect of blanket discounts on profit.

 

Imagine an electronics retailer sells 100 coffee machines at £75 each, and they buy each machine for £50. Under normal sales conditions their gross profit would look like the below:

 

Sales: £7,500

Cost: £5,000

Gross Profit: £2,500 (£25 per unit)

Now imagine that the same retailer applies a blanket discount of 10% on all of these sales to attract custom:

 

Sales: £6,750 (reduced by 10%)

Cost: £5,000 (stays the same)

Gross Profit: £1,750 (£17.50 per unit)

Therefore the 10% reduction in sales price has reduced over all gross profitability by 30%.

For this pricing methodology to be sustainable the retailer would have to sell an additional 43 units in order to reach a similar level of profit as was achieved prior to the discount.



 

Are there ways to make discounting work?

 

There certainly are but these rely on your ability to buy products in for a cheaper price maybe even specifically for the sale. This may not always be possible, but importantly it may not be something you wish to consider due to the potential for damaging your brand by selling products of an inferior quality.

But is there another way?

 

A bundle of offers.

 

Offers, love them or loath them they are here to stay and when you look at the numbers it is easy to see why!

 

Three for two offers

 

A Clothing retailer sells T-Shirts individually for £12, the cost to the retailer is £5 and they make a £7 profit per transaction.

They have decided to run a 3 for 2 offer on this range of T-Shirts and as a result they make the following profit per sale

Sales: £24 (doubled)

Cost: £15 (Trebled)

Profit: £9

Therefore the profit per transaction has increased by £2 (28.5%) due to the extra value perceived by the customer.

 

2 for £X offers

 

These offers can be even more powerful than 3 for 2 offers.

The same retailer decides to offer the range of T-Shirts for sale on a 2 for £20 deal, the customer therefore rationalises that they are paying £10 for a T-Shirt that would cost £12 if bought on its own.

The profit per transaction with this offer is as follows:

Sales: £20

Cost: £10 (Doubles)

Profit: £10

This is an increase of profit per transaction of 42.8% compared to a customer buying a single T-Shirt!

 

 

But what if you just want to increase your spend per basket?

 

Simply if you can obtain something that your customers would value, but at a low cost, consider using it as a free gift if you spend over £X. The customer thinks they have got a bargain you have increase your spend per basket and everyone’s a winner. The important thing to remember is to set the value of £X above your current spend per basket.

 

Setting your pricing strategy

As you can see it really is worthwhile sitting down and planning your pricing strategy around your business objectives in order to ensure your pricing is contributing to your overall goals.

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